HAMPTON — An outside accounting firm reported to the City Council Wednesday that an undercover cigarette firm run by the Police Division failed to properly monitor hundreds of thousands of dollars in expenditures.

A total of $135,785 in expenses charged to Blue Water Tobacco’s account at Langley Federal Credit Union was not supported by receipts or other documentation, according to the review by Cherry Bekaert LLP of Virginia Beach.

Meanwhile, $232,594 in spending from the firm’s checking account was “not properly approved” within the Hampton Police Division, even using the undercover operation’s own guidelines, the 80-page report shows.

“The operation was very lax, no doubt about that,” said Robert G. Bielat, a certified public accountant with Cherry Bekaert, which was hired by the city to conduct the accounting review. “I think a lot of procedures were not followed (or) weren’t even established at the onset of this activity.”

Some of the undocumented expenses — “cash disbursements not supported by invoice or other data,” according to the report — are for utility bills. But there are other undocumented expenses, including a $32,067 check to Farm Bureau insurance firm and $6,200 in cash withdrawals. There are also thousands of dollars in meals and travel — including expenses incurred during trips to New York and Las Vegas.

Also on the list cited by the firm are $1,468 of undocumented expenses at Wal-Mart, $1,724 at Office Max, $1,930 to Sirius-XM satellite radio, $1,632 at Lowe’s — and $34,470 in “other” undocumented expenses that were not utility bills, according to the report.

The list of the undocumented expenses does not include transactions that occurred in the last six months of 2010 — when the cigarette sting was a joint venture between Hampton and a federal agency. For that time period, Bielat said, there was even less documentation available.

The City Council did not receive the report until immediately before Wednesday’s meeting, leaving council members to read and develop questions while the presentation was under way.

Because of the lack of documentation in the operation, Bielat told the council that his firm could not conduct an “audit” of the Blue Water Tobacco’s spending using “general accepted accounting principles,” meaning his firm cannot weigh in with firm opinions on the areas of risks in the operation.

But pressed by some council members on whether he had found any evidence of embezzlement, theft or fraud on the part of the officers involved in the operation, Bielat said he had not found anything along those lines.

“Is there anything I saw during the course of this work that made me go, ‘Wow, look at this?’” Bielat said. “No.”

“I can’t say unequivocally that there’s not something there because of the lack of documentary evidence,” he said. “But there was nothing that made me come back to management and say we should consider doing more work in this area.”

He added a couple minutes later, however: “When I look at risk, we’re talking about a cash operation. Did all of the money get into the account that should have gotten into the account? I can’t say that unequivocally.”

One possible area of “risk,” Bielat told the Daily Press after the meeting, is the lack of a money trail for the cash sales to suspects during the undercover cigarette operation. There is simply no way of knowing from the documentation, he said, that the entire amount of proceeds from each sale ended up in Blue Water Tobacco’s checking account.

“There’s no way that I could know if they sold 10 cases for $10,000 and only $9,000 made it into the account,” he said. “Or if they sold $50,000 worth of cigarettes, and only $40,000 made it into the account.”

One area in which there is good documentation, Bielat said, are the purchases of Blue Water Tobacco’s cigarette product from the cigarette maker Phillip Morris. Millions of dollars in wire transfers to the cigarette firms were backed by receipts.

“That’s where the big bucks were,” Bielat said of the outflows from the operation. “All the wire transfers were supported by documentation.”

Blue Water Tobacco

The Hampton cigarette sting, which operated under the name Blue Water Tobacco, was designed to crack down on illegal cigarette trafficking by catching people in the act of buying cigarettes in low-tax Virginia and transporting them to higher-tax states, such as those in the Northeast, for resale.

The police-run company bought cigarettes from tobacco makers such as Philip Morris, advertised tax-free cigarettes online, and sold them out of a warehouse off Aberdeen Road.